COMPETITIVE ANALYSIS

Photo by: Mauro Saivezzo

Competitive analysis is the practice of analyzing the competitive
environment in which your business operates (or wishes to operate),
including strengths and weaknesses of the businesses with which you
compete, strengths and weaknesses of your own company, demographics and
desires of marketplace customers, strategies that can improve your
position in the marketplace, impediments that prevent you from entering
new markets, and barriers that you can erect to prevent others from
eroding your own place in the market.

Competitive analysis has long been a cornerstone of overall competitive
strategy for multinational conglomerates and "mom and pop"
stores alike. Moreover, business experts note that competitive analysis
transcends industry areas; indeed, the practice is deeply relevant to all
industries. For example,
Folio
contributor Bruce Sheiman provided a synopsis of the importance of
competitive analysis to the magazine industry that is fairly
representative: "First, it is critical to discover whether a
competitor is encroaching on your proposed magazine's editorial or
market franchise—or, indeed, whether a competitor renders your
magazine idea superfluous. Second, competition helps to define a
magazine's market position. I've seen business plans stating
that the proposed magazine would have no competition. This is naive. Every
magazine has competition—and needs competition. Third, competitive
magazines give you benchmarks. By studying your competitors, you can learn
much about developing your magazine's editorial, circulation,
and advertising strategies. And you can determine your revenue and
profitability prospects." Competitive analysis is of similar
importance to muffler shops, office furniture manufacturers,
photofinishing laboratories, and countless other types of business
enterprises.

Despite this, however, business experts say that while established
businesses commonly practice competitive analysis on a regular basis, new
businesses too often are derelict in this area. "Every business has
competition," wrote Rhonda Abrams in
The Successful Business Plan: Secrets and Strategies.
"Those currently operating a company are all too aware of the many
competitors for a customer's dollar. But many people new to
business—excited about their concept and motivated by a perceived
opening in the market—tend to underestimate the actual extent of
competition and fail to properly assess the impact of that competition on
their business."

ELEMENTS OF COMPETITIVE ANALYSIS

There are several important elements of competitive analysis, each of
which need to be carefully studied if one hopes to transform competitive
analysis activities into business profitability. Major aspects of
competitive analysis include the following:

DEFINING COMPETITORS
"The first step [in competitive analysis] is to define your
universe of competitors," wrote Sheiman, who warned that both
unduly broad definitions and excessively narrow definitions of competition
can compromise the effectiveness of competitive analysis. Some businesses
may offer products or services that largely mirror those offered by your
own company, while others may only dispense one or two products/services
that compete with your company's offerings. The business conducting
the competitive analysis has to decide whether latter examples of
competition are incidental or whether they present a potential threat
(either now or in the future) to the business's financial
well-being. Consultants and business experts also recommend that small
business owners scan the horizon for
potential
as well as current competitors. As
Management Review
's Oren Harari stated, "the gumption of entrepreneurs
coupled with the 24-hour electronic flows of capital they can access
worldwide means that competitors suddenly turn up out of nowhere, and
traditional barriers to entry in any business fall like bricks in an
earthquake."

ANALYSIS OF COMPETITOR STRENGTHS AND WEAKNESSES
Once a company's universe of competitors has been defined and
identified, it can start on the process of identifying the strengths and
weaknesses of those competitors. Abrams cautioned that many small business
owners are tempted to place undue weight on the quality of the product or
service they offer (or plan to offer, in the case of new businesses). This
may be a comforting thought, admitted Abrams, but it betrays a fundamental
misunderstanding of how business works: "The objective features of
your product or service may be a relatively small part of the competitive
picture. In fact, all the components of customer preference, including
price, service, and location, are only half of the competitive analysis.
The other half of the equation is examining the internal strength of your
competitors' companies. In the long run, companies with significant
financial resources, highly motivated or creative personnel, and other
operational assets will prove to be tough, enduring competition."

There are two main questions that cut to the heart of this element of
competitive analysis: What key advantages do the competing businesses
possess in the realms of production management, marketing, service
reputation, and other aspects of business operation? What key
vulnerabilities or weaknesses do the competing firms have in these same
areas?

Of course, examination of a competitor's strengths and weaknesses
also requires separating important advantages (intense customer loyalty,
for instance) and disadvantages (reputation as a polluter) from less
important advantages (a larger parking lot, perhaps) and disadvantages
(older forklift machinery). Writing in his book
Developing Business Strategies,
David Aaker suggested that business owners should concentrate their
analysis efforts in four major areas:

ANALYSIS OF INTERNAL STRENGTHS AND WEAKNESSES
Another important element of competitive analysis is determining what
your own company's strengths and weaknesses are. What aspects of
the company's operation convey an advantage in the marketplace? Is
your sales force composed of bright, ambitious individuals? Does your
company have an advanced inventory management system in place? Do you have
an employee with a talent for advertising and/or marketing? Once a company
has determined its strengths, it can go about the process of utilizing
those strengths to improve its position in the marketplace. Conversely, an
examination of internal weaknesses (uninspired product presentation,
recalcitrant work force, bad physical location, etc.) should spur
initiatives designed to address those shortcomings.

ANALYSIS OF CUSTOMER NEEDS AND WANTS

Learning about customer needs and wants is an important
part of competitive analysis as well. Customer priorities should become
your business's priorities. In addition, small businesses should
take care that they not limit their study to priorities that are already
manifested in the marketplace. Indeed, new product development and new
innovations in service are essential to business success in any industry.
Business owners and managers need to study—and thus
anticipate—future customer needs and wants as well those needs and
wants that are currently being addressed.

STUDYING IMPEDIMENTS TO MARKET FOR YOU AND YOUR COMPETITION
Businesses seeking to enter new markets typically have to grapple with
several different barriers. Some of these can be surmounted without
inordinate difficulty, while others may be so imposing that they preclude
launching a campaign. Abrams cited several common barriers to entry for
new competition:

Patents—These provide some protection for new products or
processes

High start-up costs—In many cases, this barrier is the most
daunting one for small businesses

Knowledge—Lack of technical, manufacturing, marketing, or
engineering expertise can all be a significant obstacle to successful
market entry

Market saturation—It is a basic reality that it is more difficult
to carve out a niche in a crowded market than it is to establish a
presence in a market marked by relatively light competition

"Realistically, few barriers to entry last very long, particularly
in newer industries," concluded Abrams. "Even patents do not
provide nearly as much protection as is generally assumed. Thus, you need
to realistically project the period of time by which new competitors will
breach these barriers."

BUILDING STRATEGIC PLANS TO IMPROVE MARKETPLACE POSITION
Once a small business owner has attended to the above requirements of
competitive analysis, he or she can proceed with the final element of the
practice: building a strategic plan that reflects the findings. Strategic
plans should touch on all areas of a business's operations,
including production of goods and/or services, distribution of those goods
and/or services, pricing of goods and/or services, and marketing of goods
and/or services.

CRITICISMS OF COMPETITIVE ANALYSIS

While the practice of competitive analysis is generally recognized as an
important component of longterm business success, some voices do offer
cautions about flawed competitive analysis practices. They note that
competitive analyses that are incomplete or based on incorrect data can
lead businesses to construct faulty business strategies. Analysts have
also pointed out that traditional competitive analysis has become more
complex and potentially time-consuming, since so many businesses offer
diversified products and services. Still others contend that excessive
preoccupation with keeping pace with the strategies, products, and
services of other competitors can result in atrophy in internal
originality of production and design.

Other observers, meanwhile, argue that judging your company's
performance
strictly
on the basis of how you are performing against chief competitors can
retard your business's profitability and lead to a false sense of
security. "As long as we appear to be doing better than someone
else, we can feel that we must be doing well, so we don't need to
change," wrote James R. Lucas in
Fatal Illusions.
"These illusions can begin when we compare ourselves with our own
past performance …or with the performance of other organizations.
The companies we're comparing ourselves to may
all
be performing at lower levels than the market requires. They may
all
be doing it wrong. Since every organization is unique, another
company's solutions may not apply to us…. If we've
grown at an annual rate of 15 percent compared with an industry average of
5 percent, we may be wildly successful—unless a new competitor from
an unexpected direction or unrelated industry finds a way to deliver our
service at 60 percent of our cost."

Finally, some experts contend that preoccupation with competitive analysis
too often leads companies to spend too little time looking ahead.
"Effective strategy formulation and implementation relies on
concepts like uniqueness, differentiation and standing out in a very, very
crowded marketplace. Ineffective strategy formulation and implementation
relies on concepts like imitation, caution and blending in with the rest
of the pack. Competitive analysis does a great job in fostering the
latter," wrote Oren Harari in
Management Review.
"I have no problems in performing a quick, occasional scan of what
today's competitors are doing. That is just plain prudent
management…. The problem is that executives can easily wind up
sinking big resources and becoming hypnotized into tracking the movements
of today's solutions for yesterday's customers."
Harari contended that "traditional competitor analysis is often
shortsighted in depth, range, and possibility….If you'res
pending a lot of valuable time tracking your competitors'
movements, you're not only running in circles, but you're
probably paying too much attention to the wrong guys. It's the
folks that you can't track—the ones that don't exist
yet either as competitors, or even as companies—who are your real
problems. That's because they're not worrying about tracking
you.

They're moving ahead with new offerings, redefining and reinventing
the marketplace as they go along."

FURTHER READING:

Aaker, David A.
Developing Business Strategies.
2d ed. John Wiley and Sons, 1988.